How Does a Distributed Ledger Reduce Counterparty Risk in an OTC Derivatives Transaction?

Counterparty risk is the risk that the other party in a transaction will default on their obligations. A distributed ledger reduces this risk primarily through collateral automation and atomic settlement.

Smart contracts can automatically lock up collateral and release funds only when the contract conditions are met. Atomic settlement ensures that the exchange of assets and cash happens simultaneously.

This mechanism eliminates the time lag where one party is exposed to the other's potential failure.